How Do Economists Approach the World? · Paper 3 — Free Economics HL Practice Questions

The government of Country X is evaluating two policies to reduce road congestion. Policy A introduces a congestion charge of USD 5 per day for vehicles entering the city centre. Policy B provides a subsidy of USD 3 per day for each commuter using public transport, reducing the effective price of a public transport trip from USD 5 to USD 2. The following data are available: - Average daily number of private vehicles entering the city centre (before any policy): $100{,}000$ vehicles - Average daily number of public transport users (before any policy): $200{,}000$ passengers - Original price per trip for a private vehicle user (fuel, parking, and time cost): USD 10 - Original price per public transport trip: USD 5 - Price elasticity of demand (PED) for private vehicle use: $-0.4$ - Cross-price elasticity of demand (XED) of private vehicle use with respect to public transport price: $+0.5$ - Cross-price elasticity of demand (XED) of public transport use with respect to private vehicle price: $+0.6$ - Government's daily budget for the policy: USD 200,000 $$\text{PED} = \frac{\%\Delta Q_d}{\%\Delta P}, \quad \text{XED} = \frac{\%\Delta Q_d \text{ of Good A}}{\%\Delta P \text{ of Good B}}, \quad \%\Delta = \frac{\text{New} - \text{Old}}{\text{Old}} \times 100$$